On December 30, 2013, the Internal Revenue Service (“IRS”) released two notices related to Section 501(r) of the Internal Revenue Code of 1986, as amended (the “Code”) which should be of interest to tax-exempt hospitals. The first notice addresses the ability of tax-exempt hospitals to rely on two sets of previously published proposed regulations. Perhaps more significantly, the second notice proposes correction and disclosure procedures available to tax-exempt hospitals that fail to meet the requirements of Section 501(r).

Background to Section 501(r)

In 2010, the Patient Protection and Affordable Care Act added Sections 501(r) and 4959 to the Code and amended Section 6033(b) of the Code. Section 501(r)(1) provides that a hospital organization will not be treated as tax exempt as described in Section 501(c)(3) unless the organization meets the requirements of Sections 501(r)(3) through (r)(6) as follows:

      • Section 501(r)(3) requires a tax-exempt hospital organization to conduct a community health needs assessment (“CHNA”) at least once every three years and to adopt an implementation strategy to meet the community needs identified in the assessment.
      • Section 501(r)(4) requires a tax-exempt hospital organization to maintain a qualified financial assistance policy and an emergency medical care policy.
      • Section 501(r)(5) requires a tax-exempt hospital organization to limit the amounts it charges for emergency or medically necessary care and prohibits a tax-exempt hospital from using its gross charges in such cases.
      • Section 501(r)(6) requires a tax-exempt hospital organization to comply with certain billing and collection procedures.

The requirements of Section 501(r)(3) are effective for a hospital organization’s first tax reporting year beginning after March 23, 2012. The other requirements of Section 501(r) went into effect with a hospital organization’s first tax reporting year beginning after March 23, 2010.

Notice 2014-2

The primary purpose of Notice 2014-2 is to confirm that tax-exempt hospital organizations can rely on all of the provisions of the proposed regulations published on June 26, 2012 and April 5, 2013 regarding compliance with Section 501(r) until final or temporary regulations are published or other applicable guidance is provided.

      • On June 26, 2012, the IRS and the U.S. Department of the Treasury (the “Treasury Department”) published proposed regulations regarding the requirements of Sections 501(r)(4), (r)(5) and (r)(6), as well as proposed definitions of certain key terms used in the proposed regulations (collectively, the “2012 Proposed Regulations”).
      • On April 5, 2013, the IRS and the Treasury Department published proposed regulations regarding (1) the CHNA requirements of Section 501(r)(3), (2) the related excise tax set forth in Section 4959 and (3) the reporting obligations set forth in Section 6033 (collectively, the “2013 Proposed Regulations”). In addition to these three provisions, the 2013 Proposed Regulations also made some minor revisions to the definitions of “hospital organization” and “hospital facility” contained in the 2012 Proposed Regulations and it provided guidance on the consequences of failing to satisfy any of the requirements of Section 501(r).

In response to questions it received, the IRS issued Notice 2014-2 to confirm that it is appropriate to rely on all of the provisions of both the 2012 Proposed Regulations and the 2013 Proposed Regulations. Notice 2014-2 also confirms that hospital organizations may rely on Section 1.501(r)(3) of the 2013 Proposed Regulations for any CHNA-conducted implementation strategy adopted on or before the date that is six months after final or temporary regulations are published.

Notice 2014-3

Notice 2014-3 sets forth the IRS’s proposed correction and disclosure procedures pursuant to which the IRS may excuse a hospital’s failure to meet certain 501(r) requirements. Specifically, the 2013 Proposed Regulations state that a tax-exempt hospital organization’s failure to meet one or more of the requirements listed in Section 501(r) or Sections 1.501(r)(3) through (r)(6) will be excused if such failure is neither willful nor egregious and if the hospital makes the necessary correction and disclosure as described in Notice 2014-3.

Generally, Notice 2014-3 states that the IRS will excuse a tax-exempt hospital organization’s failure to meet a Section 501(r) requirement if such failure (1) falls within the scope of Section 4 of Notice 2014-3, (2) is corrected in accordance with Section 5 of Notice 2014-3 and (3) is disclosed as set forth in Section 6 of Notice 2014-3. Notwithstanding the foregoing, the IRS notes that a failure to meet Section 501(r)(3) may still subject a hospital to excise tax as described in Section 4959. Below is a summary of Sections 4 (“Scope”), 5 (“Correction”) and 6 (“Disclosure”) of Notice 2014-3:

      • Section 4 of Notice 2014-3: “Scope.” A failure will only be excused if the hospital has disclosed and begun correcting it before the IRS first contacts such hospital about an examination. The IRS stresses that while the foregoing does not create the presumption that such failure was not egregious and willful, it may serve as an indication that it was not egregious or willful.
      • Section 5 of Notice 2014-3: “Correction.” The IRS provides four correction "principles" that hospitals should follow when correcting a failure to comply with Section 501(r): (1) the hospital must strive to restore each person affected by the failure to the position they would have occupied had the failure not occurred; (2) the hospital should take all other “reasonable and appropriate” corrective actions; (3) the hospital should make the correction as quickly as possible after its discovery; and (4) the hospital should create new or modify existing internal policies and procedures to prevent similar failures from occurring in the future. Section 5 concludes with some examples of hospitals following these four correction principles.
      • Section 6 of Notice 2014-3: “Disclosure.” Here, the IRS states that it will deem a failure to have been “disclosed” for purposes of Notice 2014-3 if the hospital reports certain information on Schedule H of its Form 990 for the tax year in which it discovers such failure. This information is as follows: (1) a description of the failure (including its type, location, number of occurrences, and so on); (2) a description of the failure’s discovery; (3) a description of the correction(s) made (including the method and date of corrections, how the affected persons were restored, etc.); and (4) a description of the practices and procedures that were established (or if already in existence, modified) to prevent future similar failures from occurring.

Notice 2014-3 provides a road map that tax-exempt hospital organizations should follow when seeking to excuse one or more failures to comply with Section 501(r). The IRS is currently seeking comment on this relatively brief guidance. Comments must be submitted by March 14, 2014.


Many hospital organizations have just completed their first tax reporting year since the requirements of Section 501(r)(3) have gone into effect. The publication of Notices 2014-2 and 2014-3 highlights the need to review your compliance with all of the requirements of Section 501(r).